Supplemental Jurisdiction Quick-Hits : A Case Note

Southern OceanOcean Tomo v. Barney, (http://docs.justia.com/cases/federal/district-courts/illinois/ilndce/1:2012cv08450/275661/76) states the governing supplemental jurisdiction rules in a business battle over the rights to a patent valuation system.

The defendant, the developer of the system, was a member of the plaintiff financial services firm (an LLC) for several years when the relationship broke down over various issues.  Citing the company’s intolerable conditions, the defendant left with a company laptop.

The plaintiff filed a state court suit under various claims including the Computer Fraud and Abuse Act (CFAA) and the defendant removed the case to Federal court.  There, the defendant counterclaimed for breach of contract and other state law business tort claims in addition to his own CFAA claim against the plaintiff.

Plaintiff moved to dismiss the state law claims on the basis that the court lacked supplemental jurisdiction over them.

Ruling: Motion denied.  Defendant can proceed on his state law counterclaims.

Reasons:

Supplemental jurisdiction principles are codified at 28 U.S.C. 1367.  This section provides that in any case where a Federal court has original jurisdiction, the Federal court has “supplemental jurisdiction” over related state law claims.

Supplemental jurisdiction is proper where the state law claims are so related to the Federal ones that they form part of the same cause of action and stem from a common nucleus of operative fact.  Even a “loose factual connection” between the state and Federal claims will generally provide a predicate for supplemental jurisdiction.

A district court can decline supplemental jurisdiction where: (1) the claim raises a novel or complex issue of State law, (2) the state law claims substantially predominates over the Federal claims; (3) the Federal court has dismissed all claims over which it has original jurisdiction, or (4) exceptional circumstances or other compelling reasons exist for declining jurisdiction.  

The defendant’s Counterclaims alleged that plaintiff violated the LLC operating agreement by withholding profits from the plaintiff and a separate shareholder agreement.  The defendant also alleged a tortious interference with contract claim against the plaintiff.
Defendant’s lone Federal claim was the CFAA one – premised on the allegation that plaintiff was trying to reverse engineer defendant’s patent system, repackage it and sell it to third parties.
Denying the plaintiff’s motion to dismiss, the Northern District found that the defendants state law counterclaims were factually connected to the plaintiff’s Federal CFAA claim. The Court held that, at bottom, Plaintiff’s counterclaims were premised on allegations that Plaintiff engaged in a lengthy fraudulent scheme to steal defendant’s patent ratings system.
And while allowing that defendant’s state law counterclaims (breach of contract, tortious interference, misappropriation) involved a broader set of facts (than plaintiff’s CFAA count), they still derived from the same operative facts that were the foundation of the plaintiff’s claims.

The Court noted that defendant’s counterclaim allegations of plaintiff’s lengthy pattern of duplicitous conduct related directly to defendant’s claim that the plaintiff was trying to pilfer defendant’s patent ratings system.  This pattern of conduct was relevant both to plaintiff’s Federal computer fraud claims and to defendant’s state law counterclaim counts.

Since plaintiff’s motive (was it really trying to reverse engineer and steal the ratings system?) was key to the parties’ state and Federal claims , the Court found they were factually linked and supplemental jurisdiction was proper.

Afterword:

Ocean Tomo provides a succinct summary of supplemental jurisdiction rules.  As long as the state law claims are temporally related and at least loosely factually connected to the Federal claims, a Federal court can – but doesn’t have to – retain jurisdiction over state law claims that normally couldn’t be filed in Federal courts.

 

 

 

 

 

 

 

 

Trademark Infringement – The Irreparable Harm and Inadequate Remedy at Law Injunction Elements

The Northern District of Illinois recently pronounced the governing standards for injunctive relief in a franchise dispute between rival auto repair shops.

SBA-TLC, LLC v. Merlin Corp., 2015 WL 6955493 (N.D.Ill. 2015) sued its former franchisee for trademark infringement after the franchisee continued using the plaintiff’s signage, logo and design plans after the franchisor declared a default and terminated the franchise.

The court granted the plaintiff’s motion for a preliminary injunction based on the following black-letter basics:

To obtain injunctive relief, the moving party must show (1) he is likely to succeed on the merits, (2) the movant is likely to suffer irreparable harm if an injunction isn’t issued, (3) the balance of harms tips in the movant’s favor, and (4) an injunction is in the public interest.

To win a trademark infringement suit, the plaintiff must show (1) a protectable trademark, and (2) a likelihood of confusion as to the origin of the defendant’s product. In the injunction context, the trademark plaintiff merely has to show a “better than negligible chance of winning on the merits.

The plaintiff here introduced evidence that it properly registered its trademarks and that the defendant continued to use them after plaintiff declared a franchise agreement default. This satisfied the likelihood of success prong.

The court next found the plaintiff satisfied the irreparable harm and inadequate remedy at law injunction elements. Irreparable harm means harm that is not fully compensable (or avoidable) by a final judgment in the plaintiff’s favor.  To show an inadequate remedy at law, the plaintiff doesn’t have to prove that a remedy is entirely worthless.  Instead, the plaintiff needs to show that a money damage award is “seriously deficient.”

Trademark cases especially lend themselves to court findings of irreparable harm and an inadequate remedy at law since it is difficult to monetize the impact trademark infringement has on a given brand. Lost profits and loss of goodwill are factors that signal irreparable harm in trademark disputes. The court further found that since it’s difficult to accurately measure economic damages in trademark cases, an inadequate remedy at law could be presumed.

Finally, the court found that the balance of harms weighed in favor of an injunction. It found the potential harm to plaintiff if an injunction did not issue would be great since the defendant franchisee could continue to use plaintiff’s marks and financially harm the plaintiff. By contrast, harm to the franchisee defendant was relatively minimal since the franchisee could easily be compensated for any lost profits sustained during the period of the injunction.

Take-away:

SBA=TLC provides a succinct summary of governing injunction standards under FRCP 65. The case stands for proposition that the irreparable harm and inadequate remedy at law prongs of injunctive relief are presumed in the trademark infringement context given the intrinsic difficulties in quantifying infringement damages.

 

 

Pleading Fraud ‘On Information And Belief’ Fails Rule 9 Specificity Test

In Deschepper v. Midwest Wine and Spirits,2015 WL 1433230, the Northern District considered the necessary pleading allegations for claims based on the Illinois Wage Payment and Collection Act (“IWPCA”), common law fraud and successor liability in an employment dispute involving former salespersons of a liquor wholesaler.  The employer (and their principals) defendants moved to dismiss under FRCP 12(b)(6).  The court granted in part and denied in part the motion.

The Illinois Wage Payment and Collection Act Claim

Upholding the IWPCA claim, the Court held that to state a claim under the IWPCA, a plaintiff “must plead that wages or final compensation is due to him or her as an employee from an employer under an employment contract or agreement.” 820 ILCS § 115/5.  An employment contract or agreement under the IWPCA doesn’t have to be formal or even written.  Instead, employers and employees can manifest their assent to employment terms by conduct alone.

Here, while there wasn’t a formal written employment contract, the Court still sustained the IWPCA count since the plaintiffs alleged that they had a hybrid salary-plus-commissions arrangement.  This was enough to survive dismissal of the IWPCA claim.

Successor Liability

A plaintiff suing under a Federal statute (like the Fair Labor Standards Act here) can sue on a successor liability theory where (1) the successor had notice of the plaintiff’s claim prior to the acquisition; and (2) there was substantial continuity in the operation of the business before and after the sale/acquisition.

The plaintiffs stated sufficient factual allegations to support a successor liability claim against a corporate entity plaintiff said was formed for the purpose of continuing the employer defendant’s business while avoiding that first employer’s Federal overtime payments to employees obligations.

Fraud

Plaintiffs fraud claims failed because they pled the facts “on information and belief.”  Alleging fraud on information and belief is insufficient to state a fraud claim unless (1) the facts constituting the fraud are not accessible to the plaintiff and (2) the plaintiff provides the grounds for his suspicions.

The court found that the plaintiffs’ shotgun pleading, and generalized assertions of fraud weren’t specific enough to place the court and the defendants on notice of the alleged factual basis for the claimed fraud. As a result, the Complaint didn’t satisfy FRCP 9(b)’s  particularity requirement for alleging fraud.

The fraud claim was also deficient since plaintiffs didn’t allege that the underlying fraud facts weren’t accessible to them and also failed to plead the factual bases for their suspicions that defendants were setting up various business entities to evade paying overtime to the plaintiffs.

Afterwords:

– An actionable IWPCA claim doesn’t require a formal written agreement.  All that’s required is the employer and employee manifest assent to payment terms through their conduct;

– Fraud pleading must rise above notice pleading under FRCP 9(b).  Absent specific factual assertions to support the fraud, the claim will likely be dismissed;

– Successor liability applies where defendant forms an entity that is arguably set up to avoid predecessor corporate obligations.